Financial Stability and Monetary Policy – A Framework
The paper presents a stylised framework to analyse conditions under which monetary policy contributes to amplified movements in the housing market. Extending work by Hyun Shin (2005), the paper analyses self enforcing feedback mechanisms resulting in amplifier effects in a credit constrained economy. The paper characterizes conditions for asymmetric effects, causing systemic crises. By injecting liquidity, monetary policy can prevent a meltdown. Anticipating such a response, private agents are encouraged to take higher risks. Provision of liquidity works as a public good, but it may create potential conflicts with other policy objectives and may give incentives to build up leverage with a high systemic exposure to small probability events.
|Date of creation:||2007|
|Date of revision:|
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- Gunter Franke & Jan Pieter Krahnen, 2007.
"Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations,"
in: The Risks of Financial Institutions, pages 603-634
National Bureau of Economic Research, Inc.
- Franke, Günter & Krahnen, Jan Pieter, 2005. "Default risk sharing between banks and markets: The contribution of collateralized debt obligations," CFS Working Paper Series 2005/06, Center for Financial Studies (CFS).
- Günter Franke & Jan Pieter Krahnen, 2005. "Default risk sharing between banks and markets: the contribution of collateralized debt obligations," CoFE Discussion Paper 05-04, Center of Finance and Econometrics, University of Konstanz.
- Guenter Franke & Jan Pieter Krahnen, 2005. "Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations," NBER Working Papers 11741, National Bureau of Economic Research, Inc.
- Eichberger, Jürgen & Summer, Martin, 2004.
"Bank Capital, Liquidity and Systemic Risk,"
Sonderforschungsbereich 504 Publications
04-45, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Holmstrom, B & Tirole, J, 1996.
"Private and Public Supply of Liquidity,"
96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
- Upper, Christian & Worms, Andreas, 2002.
"Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?,"
Discussion Paper Series 1: Economic Studies
2002,09, Deutsche Bundesbank, Research Centre.
- Christian Upper & Andreas Worms, 2001. "Estimating bilateral exposures in the German interbank market: is there a danger of contagion?," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229 Bank for International Settlements.
- Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
- Martin Hellwig, 1998. "Financial Institutions in Transition: Banks, Markets, and the Allocation of Risks in an Economy," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(1), pages 328-, March.
- Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
- Illing, Gerhard, 1992. "Private Information as Transaction Costs: The Coase Theorem Revisited," Munich Reprints in Economics 19522, University of Munich, Department of Economics.
- Franklin Allen & Douglas Gale, 2005. "From Cash-in-the-Market Pricing to Financial Fragility," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 535-546, 04/05.
- Milgrom, Paul & Roberts, John, 1994. "Comparing Equilibria," American Economic Review, American Economic Association, vol. 84(3), pages 441-59, June.
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